Crypto: Rage Against The Investing Machine

In 2009 during the height of the financial crisis, a mysterious alias by the name of Satoshi Nakamato invented Bitcoin and released it to the public for the first time ever. Fast forward 12 years later, and this asset has severely disrupted our financial system and now has a market cap of around $800 billion dollars. But what exactly is Bitcoin and cryptocurrency? What is the future of this disruptive asset? Will it completely end fiat money as we know it?

For starters, cryptocurrency and Bitcoin are digital currencies that only exist online. No single person or organization controls the production of these currencies since its production is in the hands of a network of people. The people who produce crypto (this can be anybody), engage in a process called mining. This process entails using a computer to solve a computationally complex problem. Once these problems are solved, a new block (a certain record of when certain transactions happened at certain dates) is added to the blockchain (the entire record of all transactions). In exchange for verifying and adding transactional records to the blockchain, the miner is rewarded with a certain number of crypto for their contributions.

Cryptocurrencies such as Bitcoin are significant since it enables a currency to exist which isn’t controlled by anybody. This is a good thing since the sheer amount of power that banks have amassed thanks to their currency monopoly has led to a variety of abuses and incompetencies such as the 2008 financial crisis, an increase in the frequency of war by making the funding of war easy, and a massive devaluation of the currency. Prior to the establishment of a central bank in 1913, the dollar inflated by only 0.4% annually. Since the establishment of the central bank however, this figure has risen to 3.5%!

So, what is the future of cryptocurrency in our financial system? Will it save us from banks and replace fiat currency (currency backed by the guarantee of the government) as we know it? Well, yes and no. For starters, the U.S government will never adopt a decentralized currency as its official form of money. This is because the government wouldn’t want to give up its hold on money production since it wouldn’t be in its self-interest to do so. You can do a whole lot more as a government when you have the ability to simply print more funds. Furthermore, embracing a deflationary currency such as bitcoin would be disastrous for the government. In a world where the value of the currency is going up every year, the value of what you owe is also increasing. This makes it increasingly difficult and costly to pay off the debt to a point where it’d be impossible to do so. This would collapse the government and set up a situation going forward where no government could ever borrow money. While although this may sound good to those who wish for our government to exercise fiscal discipline, this is ultimately bad since history shows that sometimes a crisis arises which necessitates that the government borrows money.

What the government will do however is set up a centralized cryptocurrency under their control. The worth of this currency will be tied to the value of the national currency, and will be used to disperse stimulus checks, transfer funds to and between government organizations, and be used to fund any government project. Since the history of this currency will be fully documented on the blockchain, this will lead to less corruption and give tax-payers more information on what exactly their money is being spent on.

When it comes to the individuals use of cryptocurrency, the economic impact will be massive. According to the world bank, the amount of cash that was transferred across borders hit $700 billion in 2020. This $700 billion was subjected to an average fee of 7% which meant that $49 billion dollars worth of value was lost simply due to the friction of our financial system. Cryptocurrencies (especially on decentralized exchanges) have fees that are well below 1%. This will save people billions of dollars, and will speed up the socioeconomic development of countries such as Guatemala that receive more than 10% of their GDP annually from remittances.

While although the savings that crypto will lead to in remittances is impressive, it pales in comparison to what its overall impact in the currency trading market will be. Every day 6.6 trillion dollars of currency is traded and subjected to a fee which is 2% on average. This means that every year the world economy loses $48.2 trillion dollars in exchange fees to financial intermediaries. Cryptocurrencies will be able to plummet the fee rate in excess of 90% due its decentralized nature, which means that the world economy will save over $40 trillion dollars on an annualized basis! This alone will make cryptocurrency the single greatest transfer of wealth in the history of the world, and the size of the global economy will grow by nearly 50% just from the savings in currency transaction fees alone.

While although not as impressive, the savings that the world economy will realize from reductions in the level of fraud will not be insignificant either. Based on the Financial Cost of Fraud Report, it is estimated that fraud cost the global economy 5.1 trillion dollars (7.1% of all dollars in circulation). While although blockchain won’t ever eliminate all cases of fraud, it will certainly decrease the level of fraud in the economy. This is because all of the transactions that take place via cryptocurrency are automatically documented by the miners who produce new currency. Due to this digital paper trail, it becomes a lot easier to track down the individual who made you a victim of fraud. At the very least, it’s not unreasonable to assume that cryptocurrencies could at least save the global economy $250 billion annually (a roughly 5% reduction in the economic impact of fraud).

As fraud is being reduced, an entirely new ecosystem of finance known as DeFi will be springing into existence. DeFi (Decentralized Finance) is a system of finance that uses a decentralized network inherent in the cryptocurrency to facilitate contracts and financial matters as opposed to traditional intermediaries such as banks, lawyers, and institutions. This will lead to a variety of superior products and services that the traditional financial system could never supply. Crypto credit cards for example will offer interest rates of up to 8% per year since the banks will no longer take the value that your deposit accrued them while it was sitting in there. Insurance costs meanwhile would plummet since a well constructed decentralized network could reduce the administrative tasks through smart contracts (a self-executing contract or action programmed into the cryptocurrency. If you want to read more about it click here). Since administrative cost makes up 34% of health insurances cost in the US, it wouldn’t be unreasonable to assume that insurance cost would fall by at least 5–10% from crypto.

As DeFi absorbs more of the financial services market, the size of the banks will decrease since much of their revenues are derived from providing financial services. As the banks decrease in size, their existential threat to the economy will fall since smaller entities pursuing their financial self-interest aren’t as consequential as larger entities who do so. This will make banking-fueled market failures such as the 08 financial crisis less likely, and will give the government more freedom to let banks fail since their failure will pose less of a risk to the system. In the long-run this will lead to a more resilient but smaller banking sector and with it a more stable financial system that is less victimized by its convoluted whims and schemes. As DeFi and crypto shrinks the size of the banks, the banks will lash out and become much more aggressive in order to fight these disruptive forces and preserve their power (much like the oil and media industry did when faced with disruption). This will include buying up and destroying their competition, economic sabotage, lobbying, marketing campaigns, and the buying off of politicians in order to pass laws which hold back this technology. Just like with renewable energy, social media, and the internet however, DeFi and crypto will not be stopped.

Finally, the individual is going to use crypto as an inflation-resistant store of value. Due to crypto’s deflationary nature, many people will choose to invest in crypto rather than gold or real estate. This will decrease the cost of gold and housing, and will perhaps lead to a situation where houses become a lot more affordable then what they are currently. While although lower housing prices will be good for individuals wishing to purchase a home, it’ll be bad for local governments who derive a fair portion of their income from property tax. This fall in property tax-revenue for many jurisdictions will require local governments to get creative in making up for those loss-funds (either cutting services, finding new taxes, or raising existing taxes).

So to sum up everything: Crypto is going to cut down on corruption, and make the delivery and transaction of funds more transparent and efficient in government. It is also going to save the world economy tens of billions of dollars in remittance costs, tens of trillions of dollars in currency exchange fees, hundreds of billions of dollars in fraud costs, speed up the socioeconomic development of 2nd and 3rd world countries, increase the returns and decrease the cost associated with financial services, decrease the size of banks, and serve as the greatest inflation-resistant store of value ever invented.

All of this in tandem will increase the size of the economy significantly due to the massive gains in savings and financial efficiency, which will usher in an era of unprecedented wealth. Due to the sheer economic impact of cryptocurrency, the politics of the world will shift toward one of greater cooperation since the frictionless nature of crypto will connect us in ways we never could be before. On the domestic political front, trust in government institutions will rise since the public will feel increased confidence knowing that they can view the financial history of these institutions anytime they’d like. On a darker note, nations in the foreign policy arena will have less of an ability to punish other nations with economic sanctions since crypto will make it impossible for countries to shut other countries out of the global economy. This will make information warfare the preferred tool of punishment for those who break international law (this warfare uses algorithms, memes, and artificially intelligent agents to disseminate information technology in such a way that serves the interest of the state). Information warfare will be used to change minds so that certain people will win elections, polarize enemy societies, and weaponize digital infrastructures so that our adversaries cannot function.

On a social front, the increased use of crypto will increasingly expose us to incentives that encourage us to save money. This is because if money is gaining in value every year, you’re financially encouraged to hold onto it rather than spend it in the present since it’ll be worth more in the future. These incentives are exactly the opposite in fiat system of money since consistent inflation financially encourages us to spend now when the prices are lower rather than later.

As the use of crypto increases people’s valuation of the future, our culture will become more mindful of intergenerational and individual interests. These cultural pressures will make it so that our civilization will want to play the infinite game, a mode of being where humanity can exist indefinitely. This culture would eventually lead to things such as the end of fossil fuels, universal recycling systems, and the eventual digitization of all assets (NFT’s) so that resource use can fall into a more sustainable range. It is this mode of being, this form of operation that is needed so that humanity can hope to exist in perpetuity. Since blockchain and crypto provide the incentive structure necessary to play this infinite game, historians one day will look back and say that this invention was the most important one of our time.

Let the new games begin, and cheers to the revolution, my friends.